* FDIC preparing for massive bank failures

2008-02-15

Richard Moore

http://www.fdic.gov/news/news/financial/2008/fil08002.html#body

Financial Institution Letters

Processing Deposit Accounts in a Bank Failure;
Modernizing Large-Bank Insurance Determinations
Notice of Proposed Rulemaking
FIL-2-2008
January 14, 2008

Summary:

The FDIC is proposing the attached two-part rulemaking relating to the potential
failure of an FDIC-insured depository institution: The first part of the 
proposal would govern how and at what point deposit account balances would be 
determined in the event of a failure, and applies to all FDIC- insured 
depository institutions. The second part proposes requirements to facilitate the
process for determining the insurance status of depositors of large insured 
depository institutions in the event of failure. Comments on the Notice of 
Proposed Rulemaking are due by April 14, 2008.

Highlights:

€ When an FDIC-insured depository institution fails, the FDIC must determine the
total insured amount for each depositor. The rules used by the FDIC to determine
account balances as of the day of failure must be clearly established. As 
proposed, a deposit account balance on the day of failure would be defined as 
the end-of-day ledger balance of the deposit account on the day of failure. The 
proposed rule would apply to all insured depository institutions.

€ The FDIC also is modernizing its current business processes and procedures for
determining deposit insurance coverage in the event of a failure of one of the 
largest insured depository institutions (i.e., the 159 institutions with at 
least $2 billion in domestic deposits and either more than 250,000 deposit 
accounts or at least $20 billion in total assets, regardless of the number of 
deposit accounts).

€ The proposed claims modernization rule would require the largest institutions 
to modify their deposit systems so that the FDIC could calculate deposit 
insurance coverage quickly in the event of failure.

€ The FDIC originally solicited comments on claims modernization in 2005 and 
2006. Based on its review of the comments, the FDIC is proposing the 
least-costly approach that would meet its objectives in the event of a 
large-bank failure.

Continuation of FIL-2-2008
Distribution:
All Insured Depository Institutions
Suggested Routing:
Chief Executive Officer
Chief Operations Officer
Related Topics:
Deposit Insurance Coverage
12 C.F.R. Part 330
Attachment:
Notice of Proposed Rulemaking 1192k (PDF Help)
Contact:
James Marino, Project Manager, Division of
Resolutions and Receiverships, at
•••@••.••• or 202-898-7151; or Joseph A.
DiNuzzo, Counsel, Legal Division, at
•••@••.••• or (202) 898-7349
Printable Format:
FIL-2-2008 - PDF (PDF Help)
Note:

FDIC financial institution letters (FILs) may be accessed from the FDIC's Web 
site at www.fdic.gov/news/news/financial/2008/index.html.

To receive FILs electronically, please visit 
http://www.fdic.gov/about/subscriptions/fil.html.

Paper copies of FDIC financial institution letters may be obtained through the 
FDIC's Public Information Center, 3501 Fairfax Drive, E-1002, Arlington, VA 
22226 (1-877-275-3342 or 703-562- 2200).


Financial Institution Letters
FIL-2-2008
January 14, 2008
Processing Deposit Accounts in a Bank Failure;
Modernizing Large-bank Insurance Determinations
Notice of Proposed Rulemaking

The Federal Deposit Insurance Corporation (FDIC) has issued the attached 
two-part Notice of Proposed Rulemaking relating to the potential failure of an 
insured depository institution:

€ Part 1 proposes a rule governing how and at what point deposit account 
balances would be determined in the event of an insured depository institution 
failure. This part would apply to all insured depository institutions.

€ Part 2 proposes requirements to facilitate the process for determining the 
insurance status of depositors of large insured depository institutions in the 
event of failure. As proposed, the Part 2 requirements currently would apply 
only to the 159 insured depository institutions with at least $2 billion in 
domestic deposits and either (1) more than 250,000 deposit accounts or (2) total
assets over $20 billion, regardless of the number of deposit accounts. These 
"Covered Institutions" amount to less than two percent of the more than 8,500 
insured depository institutions.

Part 1. A deposit account balance on the day of failure would be defined as the 
end-of-day ledger balance of the deposit account on the day of failure. This 
account balance would take into consideration any prearranged sweep transactions
scheduled to occur that day, as long as funds are not removed from the 
depository institution after the time of failure.

When an FDIC-insured depository institution fails, the FDIC must determine the 
total insured amount for each depositor. To make this determination, the FDIC 
must ascertain the balances of all deposit accounts owned by the same depositor 
in the same ownership capacity at a failed institution as of the day of failure.
The second part of this proposed rule would require certain large depository 
institutions to place holds on deposits accounts in the event of failure. The 
amount held would vary depending on the account balance. In order to calculate 
these hold amounts, the rules used by the FDIC to determine account balances as 
of the day of failure must be clearly established.

Under Part 1, the FDIC also requests comment on whether repurchase-agreement 
sweep arrangements, as actually structured and executed, pass title to the 
customer in a transaction that is enforceable against the FDIC or create 
perfected security interests that are enforceable against the FDIC. The FDIC is 
concerned that the structure of certain sweep arrangements labeled as repurchase
agreements in fact do not result in perfected security interests, and thereby 
may result in a loss exposure to the customer in the event of failure.

Part 2. This part of the proposed rule applies to large FDIC-insured 
institutions with complex deposit systems. Covered Institutions would be 
required to adopt mechanisms that would, in the event of the institution's 
failure:

€ Allow automatic posting of provisional holds on large deposit accounts in any 
percentage specified by the FDIC on the day of failure.

  € Provide the FDIC with deposit account data in a standard format.

€ Allow automatic removal of the provisional holds and posting of the results of
insurance determinations as specified by the FDIC.

When handling a depository institution failure, the FDIC is required to 
structure the least costly of all possible resolution transactions, except in 
the event of systemic risk. In addition, the FDIC is required to pay insured 
deposits "as soon as possible" after an institution fails. The FDIC places a 
high priority on providing access to insured deposits promptly and, in the past,
has usually been able to allow most depositors access to their deposits on the 
business day following closing. Doing so enables the FDIC to (1) maintain public
confidence in the banking industry and the FDIC; (2) provide the best possible 
service to insured depositors by minimizing uncertainty about their status and 
avoiding costly disruptions that may limit their ability to meet financial 
obligations; (3) mitigate the spillover effects of a failure, such as risks to 
the payments system, problems stemming from depositor illiquidity and a 
substantial reduction in credit availability; and (4) retain, where feasible, 
the franchise value of the failed institution (and, thus, minimize the FDIC's 
resolution costs).

The largest insured institutions are growing increasingly complex. The proposed 
rule would help facilitate an insurance determination and dramatically improve 
access to depositor funds if one of these institutions were to fail. The 
proposed rule is intended to allow the deposit operations of a failed 
institution to be continued on the day following failure. It is also intended to
permit the FDIC to meet its legal mandates regarding the resolution of failed 
insured institutions, provide liquidity to depositors promptly, enhance market 
discipline, ensure equitable treatment of depositors at different institutions, 
and help preserve the franchise value of a failed institution (thus, reducing 
the FDIC's costs).

The FDIC last updated its deposit insurance determination process in 1999. The 
largest number of deposit accounts in a failed institution for which the FDIC 
has had to make an insurance determination was about 175,000 for NetBank, FSB, 
Alpharetta, Georgia, on September 28, 2007. Today, some of the larger banks have
more than 50 million deposit accounts.

Comments on the Notice of Proposed Rulemaking are due by April 14, 2008.


Mitchell L. Glassman
Director
Division of Resolutions and Receiverships


Last Updated 1/14/2008
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